Car makers will be forced to cut carbon dioxide emissions produced by new cars under fresh rules outlined today by the European commission.

The new rules, which car makers have warned will increase the price of new vehicles and could threaten jobs in Europe, will require manufacturers to reduce CO2 emissions to an average of 130g/km by 2012.

Despite the existence of voluntary targets set below that level, the current average across Europe is 163g/km, while in the UK new cars are emitting an average of 167.2g/km.

Most of the reduction is expected to come through improvements in technology, greater use of biofuels and the promotion of smoother driving techniques.

But despite representing a substantial fall in current levels, the limits - which will have to be approved by EU governments before they become law - are not as tough as the environment commissioner, Stavros Dimas, originally demanded and represent a compromise with the car industry.

Since 1995, the EU's stated aim has been to reach - by 2010 at the latest - an average CO2 emission figure of 120 g/km for all new cars marketed in Europe.

And two weeks ago the commission looked set to announce legislation for a limit of 120g by 2012.

These plans were reconsidered after disagreement between members of the commission on the impact of the new rules on the European car industry.

However, last week's dramatic IPCC report on the fate of the planet put political pressure back on Brussels to stick to its plans.

Mr Dimas said: "Cleaner, more efficient and affordable cars will help reduce carbon dioxide in the EU, enable us to achieve our Kyoto targets, save energy and encourage innovation.

"All member states will need to pull their weight in implementing the measures necessary and have a major responsibility to encourage the purchase of fuel-efficient cars as well as discourage fuel inefficiency."

The European commission president, Jose Manuel Barroso, said the new strategy was the most ambitious approach towards the development of a low carbon economy which was vital for reverting climate change.

"It is the concrete proof of EU leadership in the field," he said.

Günter Verheugen, the commission's vice-president, with responsibility for enterprise and industry policy, said the proposals would ensure that jobs were kept in Europe, while improving the car industry's environmental performance.

Mr Verheugen, who had opposed the new laws, added: "We put the emphasis also on research and development to carry the industry well into the 21st century."

The proposals for legally binding limits follow the failure of the car makers in Europe, Japan and Korea to meet voluntary targets of a 25% cut to 140g/km by 2008/09 and 120g/km by 2012.

In fact, average emissions on new cars have only been cut by 12.4% from 1995 levels, a result the commission described as "not satisfactory".

The Society of Motor Manufacturers and Traders, which represents the British motor industry, expressed "grave concerns" over the proposals, which it said would result in less choice and higher prices for consumers.

Its chief executive, Christopher Macgowan, said the industry had already demonstrated its commitment to cutting CO2 emissions and had hit interim targets of the voluntary agreement.

"We have also already produced and brought to market cars that can meet the 120g/km limit - the problem is that motorists do not buy them," he said.

Mr Macgowan said he recognised the role cars played in climate change, but that everyone was responsible for reducing emissions.

"It is important to put this in context and if the commission is intent on placing the onus onto car manufacturers, then we see serious difficulties ahead," he said.

"Not only will the choice of cars be reduced by these measures if we are to meet the limits, but independent estimates place a projected increase in the region of £2,500 to the sale price of each new car."

However, green campaigners said the proposals did not go far enough. Friends of the Earth's transport campaigner Tony Bosworth said the target was too weak.

"Following last week's devastating report on the threat of global climate change it is clear that tougher action is required, not weaker," he said.

"However, we are delighted that the EU recognises that legislation is required to make car manufacturers play their part in reducing the climate impact of their vehicles." Mr Bosworth said the motor industry "has failed to take its environmental responsibilities seriously" and that the EU should set "clear and ambitious targets" for reducing emissions in the next decade.

He added: "The UK government must also take action to cut emissions from cars.

"The chancellor must use his next budget to encourage people to buy greener cars by cutting road tax on fuel-efficient vehicles and substantially increasing it for gas guzzlers."

Road transport generates more than a fifth of the EU's CO2 emissions, with cars responsible for half of them.

Speaking before the proposals were confirmed, Aat Peterse, of the green group Transport and Environment, said car makers should not be let off lightly.

"Now they have failed to do the job they agreed to do, it makes no sense to let them off the hook," he said.

The organisation says transport is the only European sector which has shown dramatic increases in CO2 emissions over the last 15 years.

The car industry had made huge improvements in engine efficiency but the power, size and weight of cars had risen rapidly.

As a result, average CO2 emissions had fallen by just 23g/km from the 1995 level of 185g/km.

The Liberal Democrat MEP, Chris Davies, said the commission's decision was a crucial test of its commitment to tackle climate change.

"Behind the scenes commissioners have been fighting like rats in a bag, with motor industry lobbyists doing their very best to prevent the adoption of tough targets for CO2 reductions," he said.

"But last week's frightening environment report has changed the ground rules. The test for the commission is whether it will make clear its determination to meet the challenge of climate change, or back down in the face of business pressure."